IPO Process : Understanding Pros and Cons Involved
The entire IPO process begins with the intent for an IPO and the appointment of
investment bankers. The process ends with the listing. The whole purpose of the
IPO listing process is to get a good valuation in the market but also leave something
in the table for the investors so that the post listing gains will add to the reputation
of the company in the market.
What Role do Investment Bankers play?
Investment bankers to the issue are also called the book running lead managers (BRLM)
and normally large issues have multiple such BRLMs. The BRLM is central to the entire
issue process right from advising the company on the timing and pricing of the issue
to getting all the regulatory approvals in place. Investment bankers also play a
critical role in seeing that the necessary road shows are done for the benefit of
institutional investors and the necessary distribution networks are in place for
the retail investors. They also ensure investor interest in the stock post listing.
Understanding the 7 Step Process of an IPO
Appointing investment bankers
The IPO process begins with the appointment of the investment bankers to the issue.
For example, the investment banker or the BRLM is the actual manager of the entire
issue on behalf of the company. On the one hand they hand all the procedural issues
like approvals, compliance, registry coordination, allotments etc. On the other
end, the BRLMs also handle the marketing of the issue, the pricing, creation of
investor interest etc. They earn fees for this service.
The regulator, in this case SEBI, has to be appraised about the issue and the necessary
details furnished. Once the initial approval from the regulator is obtained then
the company gets down to the filing of the prospectus.
The next step is to file the basic document with SEBI. This is called the Draft
Red Herring Prospectus and when the necessary approvals are sought then the actual
prospectus is uploaded on the SEBI website with all the relevant details. The DRHP
is for the regulator to review and raise any queries if the SEBI feels that the
issue is not adhering to any of the SEBI rules. The clarifications are provided
by the company and by the BRLM.
Marketing the issue
Once the DRHP is filed and the go-ahead is obtained by the BRLM, then the actual
marketing of the issue starts. Normally, the company senior management along with
the BRLMs meet fund managers and CIOs across key locations like New York, Boston,
London Singapore and Hong Kong to generate demand and interest among investors.
In any book built issue, the QIBs account for 50% of IPO applications and hence
this step becomes very important.
Pricing the IPO
Then we get down to pricing the IPO. Normally, the BRLMs and the company sit together
after the demand estimation and work out the price band. The price band is designed
to ensure maximum demand for the IPO. IPO applications are invited at a price band
and then the actual price is discovered during the issue based on the demand and
supply for the stock.
Managing the IPO process
The next step is actually managing and administering the IPO in full. The forms
are made available in physical form. The brokers and the depositories are prepared
for accepting the online forms and brokers are made busy uploading the application
forms for the IPO. Normally, the system is designed in such a way that the entire
process of forms and uploading is completed before the cut-off time so that there
is time for any last minute changes.
Basis of allotment
Once the issue is closed and the oversubscription evaluation starts. Based on the
extent of oversubscription in each category, the actual basis of allotment is finalized
and the same is approved by the exchanges. Once the basis of allotment is approved,
it is announced in the public gazette. Then the registrar to the issue takes over
and finalizes the allotment of shares and the allotted shares are then credited
to the respective DP account of investors. All this has to be completed before the
date of listing so that those investors who want to sell on the day of listing are
free to do so.
IPO process is highly time bound process
The entire IPO process is extremely time bound and the logistic sequence has to
be managed to perfection to avoid any glitches in the process.